U.K.'s 50-Year Syndicated Bond Offer Seen Well-Timed by SocGen

  • SocGen calls long-dated gilts relatively cheap for investors
  • DMO planing to sell new debt due in 2065 via banks this week

The pieces are coming together for the U.K.’s Debt Management Office as it prepares to offer a rare 50-year bond to investors this week.

Widening yield spreads that have made longer-dated bonds cheaper versus shorter ones probably will combine with dwindling supply from the DMO and demand from pension companies to support the sale, according to Societe Generale SA. Morgan Stanley recommended investors buy longer-dated gilts and said appetite for the new bond will be helped by the fact it’s a new bond rather than an existing security. The bank estimated the sale at 4 billion pounds ($6.2 billion).

Source: Bloomberg

U.K. government bonds already were getting support as investors pushed back expectations of a rate increase by the Bank of England beyond 2016 amid a global economic slowdown and an inflation rate that has turned negative for the second time since 1960.

On top of that, the market will get an additional boost from interest payments in December as well as BOE plans to reinvest proceeds from maturing bonds that were bought in its quantitative-easing program. The government has only one bond of a longer maturity, coming due in 2068.

“It’s the sort of last big opportunity to load up on some duration,” said Jason Simpson, a strategist in London at SocGen, one of the primary dealers that trade directly with the DMO. “Given the steepness of the curve, the longer end is much more attractive as well. It sets it up quite nicely.” Simpson said the supply of new debt will be relatively low after the 50-year security is syndicated.

Yield Spread

Bonds maturing the furthest in the future have lagged behind their peers that are due earlier, with the extra yield, or spread, that investors get for holding 40-year gilts instead of those that mature in 10 years rising to 68 basis points, the widest since April based on closing prices.

SocGen recommended investors favor the 3.25 percent gilt maturing in 2044 over its 2025 counterpart, betting that the spread will narrow to about 60 basis points, from the current 75 basis points.

Last week, 30-year debt didn’t perform as well as benchmark 10-year gilts. Its yield declined three basis points, or 0.03 percentage point, in the period, 2.57 percent. Ten-year yields fell six basis points, to 1.80 percent. On Monday they both were little changed.

“Looking at the price action around previous syndications, we observe that it tends to be more amplified in cases where the DMO issues new gilts in comparison to when it taps existing issues and the richening after the syndication appears to be more marked than the cheapening into the syndication,” Morgan Stanley analysts including London-based Anthony O’Brien wrote in a client note dated Oct. 16.

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